Day: September 6, 2021

Categories
Nigeria Weekly Research

Interest rates and banks’ margins

At the end of the second quarter of the year we wrote about how Nigerian banks were moving lending rates in order to accommodate rising market interest rates (see Coronation Research: Nigerian Banks, Resilience Built In, 25 June). Since then market interest rates, and interbank lending rates, have been falling. This suggests margin expansion for banks, as well as support for those banks that rely on the interbank market for funds.  See details below.

FX

Last week, the exchange rate at the Investors and Exporters Window (I&E Window) appreciated by 0.12% to close at N411.50/US$1. Conversely, the Naira weakened by 1.15% in the parallel (or street) market to close at N530.00/US$1. As a result, the gap between the I&E window and parallel market rates now stands at 28.80%. Elsewhere, the Central Bank of Nigeria’s FX reserves rose by 1.81% to US$34.18bn. We maintain our view that the Federal Government of Nigeria’s (FGN) scheduled Eurobond issuance and the US$3.3bn allocation from the International Monetary Fund’s (IMF) Special Drawing Right (SDR) are likely to help shore up external reserves considerably over the coming months. Amidst these developments, we expect the parallel rate and the I&E Window rates to trade range-bound in the near term.

Bonds & T-bills

Last week, the bullish trend in the secondary market for FGN bonds persisted. As a result, the yield of an FGN Naira-denominated bond with 10-years to maturity fell by 9bps to 11.55%, the yield on the 7-year bond fell by 15bps to 11.25%, while the yield on the 3-year bond was up by 9bps to 9.91%. The overall average benchmark yield fell by 11bps over the week to close at 11.04%. We reiterate that a future rise in bond yields, if any, is unlikely to be sharp over the coming three months due to unaggressive borrowing as the Debt Management Office (DMO) manages the FGN’s debt service costs.

Trading in the Treasury Bill (T-Bill) secondary market was bullish, given the increase in system liquidity. As a result, the average benchmark yield for T-bills fell by 34bps on the week to close at 4.61%, while the average yield for OMO bills was up by 8bps on the week to close at 6.12%. On the other hand, the annualised yield on a 314-day T-bill in the secondary market stayed flat at 6.68%, while the yield on a 193-day OMO bill fell by 13bp to 6.61%. At the Open Market Operation (OMO) auction, the CBN sold N50.0bn (US$121.6m) worth of bills across three tenors. Stop rates remained unchanged at 7.00% for the short, 8.50% for the mid and 10.10% for the long tenor bills. At this week’s T-bill primary market auction (PMA), the DMO is expected to offer N138.2bn worth of bills across all tenors. Accordingly, we expect quiet trading in the first few days of the week in the T-bill secondary market as participants position for the PMA. Given the indications of a favourable lower interest rate environment, we expect a further dip in the stop rate on the 364-day bill.

Oil

The price of Brent crude dipped by 0.12% last week to close at a US$72.6/bbl, showing a 40.17% increase year-to-date. The average price year-to-date is US$67.20/bbl, 55.48% higher than the average of US$43.22/bbl in 2020. The price dip came in the aftermath of the forced shutdown of 2.3 mbpd of US refining capacity (13% of total capacity) and evacuations of personnel from offshore oil platforms as Hurricane Ida slammed into the U.S. Gulf Coast. Last week, the Organisation of the Petroleum Exporting Countries and its ally Russia (OPEC+) confirmed the previously-agreed increase of 400,000 barrels per day (bpd) for the second half of 2021.  Additionally, they revised their 2022 oil demand growth forecast to 4.2 mbpd, up from 3.28 mbpd. Consequently, we reiterate our view that the price of Brent oil is likely to remain well above the US$60.00/bbl mark for several months, a level that is compatible with healthy public finances for Nigeria.

Equities

The NGX All-Share Index (NGX-ASI) fell by –0.57% last week. Consequently, the year-to-date return fell to –2.51%. Oando -15.21%, Nigerian Breweries -7.69%, FCMB Group -3.91% and Stanbic IBTC -3.05% closed negative last week, while Presco +8.90%, Honeywell Flour Mills +4.23%, Flour Mills of Nigeria +3.45% and UBA +3.33% closed positive. Sectoral performances were mixed: the NGX Insurance –0.57%, followed by NGX Oil & Gas –0.12%, and the NGX Banking -0.01% declined, while the NGX Consumer Goods index +0.13% and NGX Industrial +0.11% indices gained. See Model Equity Portfolio below.

Interest rates and banks’ margins

Naira-denominated interest rates have been trending downwards for just over three months, with 1-year T-bill yields touching 6.68% at the end of last week.  Our focus is on what this means for banks and how they perform.  Specifically, Zenith Bank opened the season for H1 2021 reports ten days ago with numbers that showed margins under pressure. By contrast, Access Bank reported, on Wednesday last week, showing strong margins.  Pressure on banks can often be understood by charting interbank rates, the rates banks charge to lend to each other.

This year, interbank rates have followed the same trajectory as T-bill rates but have risen to considerably higher levels. The Nigerian Interbank Offered Rate (NIBOR), which represents the short-term lending rates of selected banks in the Nigerian interbank market, rose to a high of 17.8% on average across its four tenors in August, from 0.5% at the start of the year. However, the rate has since fallen to 10.7%, on average, at the end of last week.

Our understanding is that the CBN can strongly influence system liquidity by applying the Cash Reserve Requirement (CRR), which is officially 27.5% but is widely acknowledged to be much higher; in the region of 50.0%, effectively. So, it may be the case that the CBN has eased liquidity conditions in order to ease pressure on the interbank market over the past few months.

Commercial and Merchant Banks Reserves with the Central Bank (Naira trillions)

When we spoke with banks for our report, Nigerian Banks, Resilience Built In (25 June), almost all of them related that they were adapting deposit and lending rates to reflect the rise in rates during the first quarter of the year. The timing of these changes is important. For example, most banks stated that they were implementing changes (e.g. making loans more costly for customers) at the end of Q1 2021 or at the beginning of Q2 2021.  Therefore, if market rates fall, and their cost of funds also fall after they have just raised lending rates, spreads are likely to have increased.

In other words, this has the potential to improve banks’ Net Interest Margins. However, not all banks move at the same speed, as the different results from Zenith Bank and Access Bank show see our notes on 30 August and 3 September, respectively). The good news is that the interest rate decreases, which are likely to impact margins positively, have continued into Q3 2021. This not only helps the largest and most liquid banks but may take pressure off the smallest and least liquid banks that frequently depend on the interbank market to balance their books.

Model Equity Portfolio

Last week the Model Equity Portfolio fell by 0.35% compared with a fall in the NGX Exchange All-Share Index (NGX-ASI) of 0.57%, therefore outperforming it by 21 basis points. Year to date it has lost 0.77% against a loss in the NGX-ASI of 2.51%, outperforming it by 174bps.

Model Equity Portfolio for the week ending 3 September 2021

Last week the most significant faller for the NGX All-Share Index, as well as our Model Equity Portfolio, was Dangote Cement, which fell 1.8% and cost us a notional 35bps.  Our attention, however, was once again drawn to the banks. Although these continued to cost us in aggregate (a notional 6bps last week and a notional 5bps the week before) we actually see the data as enouraging.  Two of our bank positions turned out positive last week, which suggests selective support rather than disenchantment with the sector.  It is true that Stanbic IBTC cost us a notional 14bps last week, but Stanbic IBTC stock is not particularly liquid and price movements tend to be lumpy.  It performs well in the long term and we will be patient with it.

As forewarned a week ago we began to rotate part of our notional position in Guaranty Trust Holding into Zenith Bank and UBA, and we will continue to do so this week.  We also made some small notional purchases (the stock is not very liquid) of Custodian and Allied Insurance, and will continue to do this week, liquidity permitting.

Nota bene: The Coronation Research Model Equity Portfolio is an expression of opinion about Nigerian equities and does not represent an actual portfolio of stocks (though market liquidity is respected and notional commissions are paid). It does not constitute advice to buy or sell securities. Its contents are confidential to Coronation Research up until publication. This note should be read as an integral part of the disclaimer that appears at the end of this publication.

Categories
Coronation Insights

Are Employees still the Most Vital Assets in the Workspace?

A new economy, a digital one fueled by technological innovation, is emerging and the COVID-19 pandemic has only accelerated this technological transformation, bringing about changes in work, skill requirements, work tools and work relationships. There were concerns preceding the pandemic about the continuity of certain jobs, which have deepened as a result of the COVID-19 pandemic. These changes raise essential questions about job security. According to the World Economic Forum Jobs Report 2020, the rise of machines and automation will eliminate an estimated 85 million jobs by 2025. In its report, the World Economic Forum pointed out that automation, in tandem with the COVID-19 recession, was creating a ‘double-disruption’ scenario for workers.

This is the new normal – a digital economy requiring completely different skill sets, as well as greater expectations. To understand the changing nature of work, business, and requirements for success in this new landscape, we will provide insight into the drivers of the new work pattern, the risks associated with it and how institutions can effectively respond to the complexities of work in order to maintain a balance and achieve success.

The Future of Work

Employers anticipate a significant shift in the division of labour between humans, machines and algorithms for work. Currently, an average of 71% of total task hours across the industries covered by the Future of Jobs Report (2018) are performed by humans, compared to 29% by machines or algorithms. By 2022 this average is expected to have shifted to 58% task hours performed by humans, and 42% by machines or algorithms. This means that 13% of the time humans spent achieving tasks is expected to be replaced by machines or algorithms operating on delivering steadily rising levels of productivity in the same span of time.

Organisations are rapidly adapting by restructuring to exploit artificial intelligence and automation technology. Surveying 300 of the world’s biggest companies, the WEF found that an overwhelming 80% of decision-makers are planning on accelerating the automation of their work processes, while half are set to increase the automation of jobs in their companies.  According to the report, “Time spent on current tasks at work by humans and machines will become equal.”

The implication is that most repetitive tasks which have traditionally represented a significant proportion of daily employee work will be done by various machines. However, this trend has not established a direct or proportional reduction in the number of people needed to work. New jobs are expected to replace obsolete ones, which closely mirrors job evolution during the industrial revolution. As the steam engine prompted the agrarian community to reskill into boilermakers, ironsmiths and mechanics, artificial intelligence would create a skill gap that workers can exploit to continue to provide value to organisations. In addition, jobs involving creativity, strategic decision making, and empathy are not under threat from automation and AI in the immediate future. The consensus appears to be built around the understanding that whilst machines, algorithms, software, robots etc. will help us work faster and more analytically, they will further necessitate the need for workers to reskill, adapting to new technology.

Risks inherent in the Disruptions in Labour Markets

While the Digital Economy is believed to be creating new jobs, on the other hand, the shift to automation, and the rise in popularity of the agile innovation framework are posing risks to the traditional nature of employment and job security. We expect the following risks to emerge and characterize the labour market in the emerging work era, especially in developing countries:

  • Risks associated with the destruction of traditional jobs
    As the adoption of As the adoption of automation increases productivity and replaces labour with capital, organisational processes would require a gradual reduction in the amount of manpower. Although it is expected that jobs taken by technological advancement would be replaced by even more jobs powered by the same advancement, it is conceivable that many older workers may be displaced from their jobs as their skills become obsolete. 
  • Risks associated with the changing nature of work

    Internet enabled jobs have risen to prominence as the nature of work continues to evolve. On-demand jobs have fueled the emergence of a “Gig-Economy” that is characterized by temporary or part-time employment with one or multiple employers and self-employment arrangements. As an ever-increasing amount of people are attracted to the flexibility that platform work companies like Uber, Deliveroo and Fiverr provide, there are growing concerns that the instability that characterises these platforms may result in a loss of well-being for workers. Organisations may increasingly rely on a network contractors and sub-contractors rather than a permanent workforce. It is therefore necessary that regulations are put in place to protect the rights and wellbeing of employees.

  • Risks associated with widening income inequality.
    Although technology is becoming widespread, the economic payoff is not. As the income gap between the affluent and working class grows, experts fear this may significantly affect economic growth. Although it is argued that some measure of inequality is necessary for growth, as it rewards entrepreneurs for risks taken, the working class which represents the majority of the population does not exhibit this growth. According to the OECD, income inequality has a negative and statistically significant impact on medium term growth because the greater portion of the population cannot afford to invest in developing their human capital.

The World Development Report further identified different areas and trends that would impact future employment, using the framework below:

Trend

Employment trade-offs

Examples

Automating:
The capability of machines is increasing to cover a wider range of tasks.

Labour productivity increases: However, labour may be augmented by or substituted by capital; workers with skills to create and use these machines benefit, while others might lose out; lower prices for goods and services may increase demand and have longer term positive effects on job creation.

98,900 robots were installed in the automotive industry worldwide in 2014; IBM’s Watson computer assists oncologists to diagnose lung cancer; automation is causing middle-skill job creation to stagnate.

Connecting:
Networks connect over five billion people globally, simplifying transactions, searches, and access to information and work

Productivity increases: Information gaps reduce; global collaboration and distribution of work is possible; work could be displaced due to competition within or across markets.

Mobile phones ease farmers’ access to market information, improving earnings; ‘car sharing’ services link riders with underutilized drivers but put traditional taxis out of work.

Creating:
Digital tools allow humans to create and test new objects and ideas, reducing the costs and risks of innovation.

Product and process innovation potentially creates new sectors, firms, and jobs, but could also make some jobs redundant.

3D printing helps manufacturers cut prototyping and testing costs; computer animation has created massive jobs across the globe but displaced traditional animator jobs.

Talent management and skills development

The rapid growth of new technologies, business models, demographic shifts and economic trends are likely to have a significant global impact. Such effects will necessarily cause stress in labour markets as existing jobs to change, evolve and in some cases, disappear. It is predicted that more than half the children in schools will work in occupations that do not yet exist. Advances in robotics, artificial intelligence and autonomous/semi-autonomous vehicles are a few examples of disruptive technologies that are gaining momentum.

The effects of these cumulative changes on labour markets will not discriminate among economies, rather the extent of the impact will be defined by the degree of digital adoption across all countries. At the organisational level, preparing for the future will necessitate the pursuit of agile strategies for rapidly aligning skills to rapidly changing demands in labour markets. Such approaches may need to create a “liquid workforce” that is highly adaptable and malleable to changing market needs.
Again, these technologies can leapfrog their economies of industrial, emerging and developing countries alike, the impacts of which will only grow over time. Advances in e-commerce may help improve the underlying business environment to the benefit of firms and employees alike. Mobile financial solutions have already revolutionized banking services in parts of Africa. Ng’weno and Porteous (2018) note that digital commerce and the gig economy are opportunities for informal workers rather than a threat, allowing a ladder towards formality through integration into the formal sector through finance, contracts, taxes, and eventual registration.

The Place of Human Communication

Machines will pick up a greater number of discrete tasks – and even jobs – as we journey on in this new working era, but this will not make humans irrelevant. We must recognize that machines and the different software have their limitations, for they are limited in capacity for human activities such as expressing empathy, arbitration, leadership, problem solving and initiative. Being able to apply judgment, creativity and the human touch are all far outside the purview of current and near-future technologies, and this will remain the case for some years to come, even as the new machines become more capable.

The future workplace will still require collaborative problem-solving, creativity, abstract thinking, adapting to changing conditions and so on. In many cases humans and machines will find themselves in symbiotic relationships, helping each other do what they do best.

The work ahead, according to McKinsey, would not be so much about “beating the bots” as about becoming better humans in the digital economy. So while they may be a spike in screen time, programming and automated control buttons, there will always be a place for creative thinking that is sparked in team meetings, the process supervision that we get from our supervisors or the in-person engagements that make work fun and exciting.

References

  • Brynjolfsson, E., & McAfee, A. (2014). The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies. New York, NY: WW Norton & Company. 

 

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